Allianz Global Investors sees opportunities arising in North Asia
Insert caption here. Remove this textbox if not applicable.Allianz Global Investors (AllianzGI) is leveraging on its resources and its research expertise to uncover undervalued small- and mid-cap firms in Asia. The technology, telecom and environmental engineering sectors in North Asia, due to their relatively cheap valuations, are firmly on the radar of the firm’s mid-small cap equity products.
Raymond Chan, Chief Investment Officer, Asia-Pacific at AllianzGI points out that the fund’s small- and mid-cap investment capability is reliant on fundamental research. “We have a team of country specialists who focus on small- and mid-cap. We also have a research team which works with our investment team to carry out GrassrootsSM Research in terms of gathering intelligence and verifying investment opportunities,” he says.
“Consumer, telecom and technology are the sectors where our small- and mid-cap portfolio employs the most GrassrootsSM Research,” Mr. Chan notes, adding that the fund’s investment strategies tend to be bottom-up. “If we can identify the right names with strong business models and buy them at a reasonable valuation, we believe they can deliver good performance over time.”
Dennis Lai, a Senior Portfolio Manager at AllianzGI, claims that small-and mid-cap assets experienced a rebound in the aftermath of the Lehman Brothers debacle. However, they underwent significant sell-offs in the second half of 2011 as a result of the euro sovereign debt crisis, he explains, adding that the stocks have gathered pace again since the turn of the year.
The improvement this year has been underscored by the fact that the MSCI Asia ex Japan small-cap and mid-cap index has been up by 15% and 14.6% year-to-date, compared to an increase of 13.3% for large-caps during the same period. However, mid- and small-caps still lagged way behind large-cap on an annual basis.
According to Mr. Lai, if the European and US governments can keep economic conditions under control, mid- and small-caps will be able to achieve similar performance to large-caps going forward.
Mr. Chan points out that the risk appetite for small- and mid-caps is still pretty low amongst retail investors; however, he says this is not the case with institutional investors, who are endeavouring to diversify their investments out of core markets such as the US and Europe.
Investor confidence in mid- and small-cap stocks has recently been undermined by irregularities and fraudulent practices involving listed Chinese privately-owned enterprises. Mr. Lai says investors are now looking to protect their investments from potential corporate governance risks and are showing greater signs of caution when it comes to stock picking.
In terms of valuation, Mr. Lai states that the MSCI China index is trading at nine times price-to-earnings (PE) ratio this year with about 10% earnings growth, which is still at the lower end of the band. That compares starkly to the ASEAN countries, which are at the upper end of the band. Therefore, Mr. Lai says, now is a good time to conduct GrassrootsSM Research in North Asia.
Mr. Chan sees a lot of market opportunities in North Asia, especially countries such as South Korea and Taiwan. “We’re positive on export-oriented technology sectors. For instance, we can see that Taiwanese tech firms which served the chain of Apple products have been gaining market share from their Japanese competitors. We also favour environmental engineering related sectors like LED and water treatment firms and we look at some cyclic themes over a shorter-term investment horizon.
Mr. Lai reveals that Southeast Asian countries have long been outperforming their peers in North Asia due to falling inflation and interest rates and growing domestic consumption. But, he says, the ASEAN market is no longer as cheap as it was. “In comparison, North Asia now looks more attractive in terms of valuation despite its growth path being quite bumpy in the short run. For instance, the Chinese economy is likely to see its worst quarterly GDP growth by the second half this year,” he says.
On the firm’s stock selection process, Mr. Lai explains that mid or large-caps generally take longer to assess because of the longer investment horizon, “but we act quicker for the small-caps,” he says. Mr. Chan adds: “We believe if we pick the right companies with strong growth, management and cash flow, then we can override market volatility. We want to pick the mid- and small-caps with business models that have the catalysts and potential to be re-rated.”
From a macro perspective, Mr. Chan expects GDP growth in the US to reach 1.5% to 2% this year, despite the country’s economy facing huge structural problems in the long-term. He also predicts that the eurozone will suffer a mild recession for a period of time. “We are pretty positive on Asia compared to the US and Europe. The Asian market is not expensive at all. The biggest challenge is finding the companies that can deliver the earnings,” he concludes.
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GrassrootsSM Research is a division within the Allianz Global Investors group of companies.
All investment involves risks. Past performance is not indicative of future performance.
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